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1031 Exchange 1031 Rules
1031 Exchange 1031 Rules
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1031 Exchange Rules require property owners to identify like kind investment properties for replacement within 45 days of the close of escrow on the relinquished investment property. Furthermore, all replacement investment properties must be acquired within 180 days of close on the relinquished investment property. In addition to the 1031 Exchange timeline all 1031 exchanges must comply with one of the follow three rules: The Three-Investment Property Rule - This rule allows the exchanger to identify up to, but no more than 3 potential investment properties as qualified replacement investment properties within the allotted time frame. The 200% Rule - In the event that three or more like kind investment properties serve as replacement investment properties, the aggregate value of said investment properties can not exceed 200% of the value of the investment property sold. The 95% Exception - Finally, in the event that rules 1 and 2 do not apply to the exchange, the Ninety-Five Percent Rule takes precedence. This rule dictates that the aggregate value of the acquired investment properties must account for at least 95% of the value of the relinquished investment property when sold. This means that in order to engage in a 1031 exchange, foregoing all capital gains on the transaction, the property owner must reinvest at least 95% of the proceeds involved in the transaction. Many 1031 exchangers prefer buying investment property as tenants in common because of the ease of completing the transaction and closing on investment properties. To fully defer all capital gains taxes, all 1031 exchanges must also meet four basic requirements: 1. 100% of all proceeds from the sale of the first investment property must be reinvested into the second, replacement investment property. 2. The amount of equity ( investment property value minus loan value) of the replacement investment property must be equal to or greater than that of the relinquished investment property. 3. 1031 Exchange Requirement: By law, you must use an independent third party, called a Qualified Intermediary, to hold the proceeds of the sale. The Qualified Intermediary also will prepare the legal documents required to link together, as a qualified exchange, the sale of the old investment property and the purchase of the new investment property. 4. 1031 Exchange Requirement: exchanged investment properties must be like kind. For an investment property exchange this means real-investment property for real-investment property, but not necessarily land for land or a rental house for another rental house. It is often difficult in the short 45-day time frame to locate an investment property that has the right purchase price, debt ratio, and closing schedule to meet the 1031 Exchange Requirements-and then arrange any financing that may be necessary. Because there is a steady supply of tenants in common investment properties available they are an ideal solution for exchangers seeking management free 1031 exchange properties with steady income. |